As Draghi and ECB arrives again Thursday, M 1 Money supply annual growth rates dropped 10.3% February, minus 10.5 January. Loans to households increased from 1.6% February from 1.4% January. House purchases assumed is the biggest factor as interest rates are negative and low. Overall M 3 was unchanged at 5.0%, Credit to Government is the largest contributor to M3. Short Term deposits, not Overnight was Minus 2.5% February and minus 2.7% January. Overnight Deposit Growth Rates are holding steady at 11.6% December 2015, 11.3% January and 11.2% February 2016.
Since January 2015 and 14 months, M 3 increased 530 million Euros from 10,438 to current 10,969 while M 1 increased 674 million from 6042 to current 6716. Since September 2014 and start of negative rates, M3 rose 860 million from 10,108 to 10,969. M1 rose from 5694 million to 6716 and trades above M3. The M1 14 month average is located at 6386.78 and 18 month average at 6254.33. Both M1 averages are holding overbought to mid range. In M3, the 14 month average is found at 10674.00 and 18 month averages at 10566.55
Correlations in M1 Vs EUR/USD at the 14 month average equates to negative 44% and negative 85% at the 18 month average. In M3, Correlations V EUR/USD at the 18 month average factor to negative 85% and minus 44% at the 14 month interval. If EUR/USD is factored V both M1 and M3 based on current monthly averages, correlations calculate to minus 65% and + 27%. The noted point is the ECB releases money supplies against a two month lag, February was the last M 1 and M3 release so prior EUR/USD correlations factored from February 2016 – September 2014 when the ECB went negative to Eonia. Despite the lag and factored to current EUR/USD, correlations fail to change on a wholesale basis particularly M3.
M1 at 6716 Vs EUR/USD is out of bounds from the 14 and 18 month averages. To retain ranges, M1 must trade to 6524.08 and 6495.20. Ranges then become 6524 and 6495 – 6324.67 and 6322.21. Targets for M1 are located at 6592.58 and 6563.79. Ranges in M3 from current 10968 are again out of bounds as is the M1 counterpart in the 14 and 18 month points and should trade at 10785.00 and 10762.87. Normalized ranges then become 10700’s – 10623.12 and 10622.02.
Since the ECB cut Eonia to Negative September 2014, M1 and M3 rose steadily but the rise actually began in 2011 with a dip in 2013 to allow EUR/USD to see 1.3900 highs. A further ECB stimulus program would again see M1 and M3 continue its rise and a EUR/USD dive. Further rises in M1 and M3 would see more overbought for both.
The vital points in monthly averages for EUR/USD are located at 1.1242 and 1`1079. The range is located at 231 and 375 pips, and imples EUR/USD at roughly 1.0867 – 1.1617. The factor to consider in 1.1617 is Eonia despite 4 cuts since September 2014 only reflects the first cut dated to the 1 year average. The 1 year average should break this week to reflect the 2nd Eonia cut. This means 1.1617 EUR/USD is a stretch.
Brian Twomey, Inside the Currency Market, btwomey.com